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Dec 31, 2015

Court Update: U.S. Supreme Court Explores Boundaries of Federal/State Jurisdiction over Natural Gas and Electricity Markets

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Decisions by the U.S. Supreme Court in 2015 and 2016 examine whether regulation by the Federal Energy Regulatory Commission (FERC) of electricity and natural gas markets oversteps the boundary between state and federal jurisdiction over those markets and to explain how the boundary might be drawn. Three cases ─ one decided and two pending ─ address “field preemption,” where Congress intends to foreclose any state regulation in a particular area, as opposed to “conflict preemption,” which exists where compliance with both federal and state law is impossible.

Under the Natural Gas Act (NGA), FERC has jurisdiction, among other things, over wholesale sales and transportation of natural gas in interstate commerce. Under the Federal Power Act (FPA), FERC has jurisdiction over, among other things, the sale and transmission of electricity at wholesale in interstate commerce. Regulation of retail sales and local distribution of natural gas and electricity is subject to state regulation.

In April 2015, in a 7-2 decision,1 the Supreme Court affirmed a decision by the U.S. Court of Appeals for the Ninth Circuit that antitrust claims made against an interstate pipeline under state law are not preempted by the NGA, because the claims were aimed at practices affecting retail prices, a matter firmly on the states’ side of the dividing line between federal and state jurisdiction. In Oneok, a group of companies that purchase natural gas directly (at retail) from interstate natural gas pipelines sued the pipelines, alleging that the pipelines’ manipulation of natural price indices violated state antitrust law. The pipelines argued that the antitrust suits target activities that affected wholesale as well as retail rates and therefore are preempted by the NGA’s provisions giving FERC jurisdiction over wholesale natural gas rates. The Supreme Court ruled that where a state law can be applied to sales subject to state jurisdiction as well as sales not subject to state jurisdiction, preemption can be found only where a detailed examination convincingly demonstrates that a matter falls within the preempted field, and that the target at which the state law aims must be considered in determining whether the law is preempted.

In his dissenting opinion, Justice Scalia (joined by Chief Justice Roberts) claimed that the Supreme Court’s decision “smudges” the line between federal and state jurisdiction over trade in natural gas. 

In 2016, the Supreme Court may have occasion to apply its Oneok decision to two pending cases under the FPA.

In May 2015, the Supreme Court granted FERC’s petition for certiorari to review a 2014 decision by the U.S. Court of Appeals for the District of Columbia Circuit that vacated in its entirety FERC Order No. 745.2 The order required that a demand response resource participating in an organized wholesale energy market must be compensated for the service it provides at the market price for energy when the demand response resource has the capability to balance supply and demand as an alternative to a generation resource and when the dispatch of the demand response resource is cost-effective.3

The D.C. Circuit found that demand response is “part of the retail market” and that “a reduction in consumption cannot be a wholesale sale.” The court concluded that, in Order No. 745, FERC had “encroach[ed] on the states’ exclusive jurisdiction to regulate the retail market.” 

The Supreme Court heard oral argument in the case in October 2015.4

Also in October, the Supreme Court agreed, over FERC’s objections, to review a decision by the U.S. Court of Appeals for the Fourth Circuit,5 which held that the FCPA preempted incentive pricing established by the Maryland Public Service Commission for new generation that cleared the PJM market and that is different from the price the same generation would receive in wholesale markets under rules established by FERC.

Oral argument in the case has been scheduled for February 24, 2016.6 The Supreme Court has not yet decided whether or not to grant certiorari with respect to a decision by the U.S. Court of Appeals for the Third Circuit finding that a similar incentive program in New Jersey is preempted by the FPA.7

1  Oneok, Inc., et al. v. Learjet, Inc., et al., 575 U.S. ___ (2015) (“Oneok”).
2  Demand Response Compensation in Organized Wholesale Energy Markets, Order No. 745, FERC Stats. & Regs. ¶ 31,322 (2011), reh’g denied, Order No. 745-A, 137 FERC ¶ 61,215 (2011), reh’g denied
, Order No. 745-B, 138 FERC ¶ 61,148 (2012).
3  EPSA v. FERC
, 753 F.3d 216 (D.C. Cir. 2014)
4  FERC v. EPSA, No. 14-840 and Enernoc, Inc., et al., v. EPSA
, No. 14-841.
5  PPL Energyplus, LLC. v. Nazarian
, 753 F.3d 464 (4th Cir. 2014).
6  azarian v. PPL EnergyPlus, LLC, No. 14-614, and CPV Maryland LLC  v. PPL EnergyPlus, LLC
, No. 16-623.
7  PL Energyplus, LLC v. Solomon, 766 F.3d 241 (3d Cir. 2014).

Authors and Contributors

Donna J. Bobbish

Counsel

Project Development & Finance

+1 202 508 8089

+1 202 508 8089

Washington DC

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